Last June, when the Rent Guidelines Board voted for an unprecedented rent freeze for the city’s one million rent stabilized apartments, landlords warned of impending disaster.
“A rent freeze on the surface may sound pro-tenant,” Joseph Strasburg, president of the Rent Stabilization Association, told the New York Times, “but the reality is landlords will now have to forgo repairing, maintaining, and preserving their apartments.”
With the Rent Guidelines Board now deliberating rent increase levels for the next year, a natural question emerges: How have landlords and their housing stock fared during the past seven months?
Few statistics are yet available to quantify the impact. Data from the Department of Housing, Preservation and Development show fewer emergency violations in the first six months of FY 2016 compared to the first six months of FY 2015, but agency officials say this difference was likely due to a mild winter.
Jack Freund, vice president of the Rent Stabilization Association, says the city will see the effect of the freeze over time. Owners, he says, “are going to focus on the essentials. Where they’re going to scrimp is less obvious and less sensitive to the kind of measures people look at. Maybe they were going to repaint the hallways and the lobby. They’re going to put that off.”
At a Rent Guidelines Board meeting on Thursday, Chris Athineos, landlord and co-president of the Small Property Owners of New York (SPONY), echoed this perception. “SPONY owners try to maintain our buildings with the long term in mind. This board’s actions are forcing small owners to be more reactionary rather than take a proactive approach,” he said. “Once we get to the point where there’s a crisis every day, there’s no turning back.”
Athineos told City Limits he has delayed insulating a vacant apartment and may need to delay other future maintenance projects. SPONY co-president Jimmy Silber says he’d forgone repainting the hallways and replacing light fixtures of his 85-unit building in Greenwich Village. Scott Walsh, vice president of Forest City Ratner and a representative for landlords on the Rent Guidelines Board, said Forest City Ratner had also made cuts—and would need to start cutting staff if the Rent Guidelines Board issued another rent freeze next year.
Landlord dispute past year’s expenses
One statistic belies these anecdotes of landlords’ tightening their belts. Each year, the board measures the Price Index of Operating Costs (PIOC), which indicates the change in operating costs based on a price assessment of a set of goods and services. This year’s report shows PIOC fell by 1.2 percent, the second instance of a decrease since 1969.
According to board reports, a 41.2 percent drop in fuel costs, thanks both to decreasing fuel oil prices and a mild winter, offset 7.5 percent increases in taxes, 3.2 percent increases in labor costs, 8.2 percent increases in insurance costs and other expenses. If the costs of operating a rental unit have decreased, landlords should be in no worse shape—if not in better shape—than prior to the rent freeze.
But Silber, Athineos, and Walsh insist their costs did go up. They point to the great variability in costs for different owners, and note that buildings that run on steam or natural gas did not benefit from the 45.5 percent drop in oil prices. (The price of natural gas dropped 31.6 percent, the price of steam 31.2 percent.)
Silber said one landlord with a six-unit building in Astoria has a rent stabilized tenant paying $800 a month, and therefore has collected $96 in rent increases over the past two years. “He said to me, ‘Jimmy, I pray every night that I don’t have a plumbing repair in that apartment because…I have spent four-fold what I have gotten from the Rent Guidelines Board,'” Silber said at Thursday’s board meeting.
Many trade associations also dispute the accuracy of the PIOC, noting that it does not include the cost of making capital improvements or complying with many new regulations, such as energy audits and hiring contractors who are lead-certified.
“Everybody wants these kinds of improvements in the built environment but there’s a cost to this stuff and nobody seems to be willing to pay for it,” says Freund. He adds that rather than use PIOC to assess owner expenses, the board should look at long-term trends, such as the actual operating costs reported by landlords to the NYC Department of Finance from 2011 through 2014. During that period, according to a board report, landlords’ real operating costs increased annually between three and five percent.
Different perceptions of profit
It’s hard to say whether PIOC may have underestimated the costs to landlords this year. While PIOC, as a measure of prices, is not a perfect measure of the actual costs reported by landlords, PIOC actually overestimated the costs to landlords more often than underestimated those costs between 1990 and 2014, according to the report.
Yet one might wonder whether, whatever the slight rise or fall in this past year’s costs, New York City landlords are simply doing well enough to deal with a rent freeze.
Rent stabilized landlords’ net operating income (income after expenses) has increased every year for the past ten years. In the years 2012 through 2014, landlords spent an average of roughly $10,800 per unit annually and realized about $5,500 in net operating income—a roughly 50 percent return. Landlords’ income differed depending on the location of the building: a typical 45-unit building in Manhattan’s core yielded an average net operating income average of $264,000 in 2014, while a similar building outside of central Manhattan yielded $210,000.
Walsh says not all landlords have thrived these past ten years, especially those outside of gentrifying neighborhoods where rents have increased dramatically. Since 1990 the average net operating income in Brooklyn has increased 86 percent, while in the Bronx it has increased only 33 percent.
Patrick Siconolfi, executive director of the Community Housing Improvement Program, said it was a “very serious misunderstanding” to equate the board’s calculation of net operating income with profits because the measure does not incorporate the costs of capital expenses and debt service.
“Profits are going nowhere in the direction that Net Operating Income is going,” he says.
Affordable housing developers remaining calm
Nonprofit developers, however, had a somewhat different story to tell.
“The rent freeze did not hurt us,” says Harry DeRienzo, president of Banana Kelly CIA Inc. and board chair of the Association for Neighborhood Housing Development, which advocated for a rent freeze last year. He said Banana Kelly’s portfolio is doing “very well” thanks to the past year’s low fuel costs.
Scott Short, housing director at the Ridgewood Bushwick Senior Citizen Council, said that after the rent freeze was announced, his organization had budgeted accordingly, and expected to break even thanks to low fuel and insurance costs.
Both, however, said that continuous rent freezes would not be sustainable. Banana Kelly’s developments are underwritten with an expectation of an annual 3 percent increase in expenses and a 2 percent increase in rent and will need some kind of rent increase to remain in fiscal health. In addition, affordable housing developers face increasing water rates and labor costs, especially with the coming phase-in of the $15 minimum wage.
DeRienzo said Banana Kelly will likely not advocate for another rent freeze this year, but neither will they oppose their resident associations’ demands for a freeze or rollback. DeRienzo also supports other measures to protect tenants, such as reforms to end vacancy decontrol.
Deputy director of the Association for Neighborhood Housing and Development Barika Williams says nonprofit developers are able to control their costs—perhaps explaining the difference in attitude toward the rent freeze—because they take advantage of a number of city programs to lower expenses.
“It’s sort of like coupon clipping for your groceries—it might take a little more time but it keeps your bills lower,” says Williams. Some for-profit landlords, she says, resist cost cutting because it “runs counter to their end goal of potentially raising the rent on some of those units.”
Freund of RSA disputed this accusation, arguing that landlords always want to bring down their costs. Furthermore, he said nonprofit developers are at an advantage to for-profit landlords because they are exempted from property taxes, which are expected to grow by double digits in some parts of the city this year. (Many for-profit developers also receive property tax exemptions, however, such as those who obtain 421a tax credits.)
All in all, without other tools to offset landlord costs, it’s likely unsustainable to have rent freezes forevermore, especially with the PIOC expected to grow by 4.5 percent from 2016 to 2017. Yet it’s truly unclear how much a few years of little-to-no rent increases has affected landlords’ profits or harmed the housing stock.
And what landlords believe they can bare may depend on how they view their mission—from Short, who says rent stabilized housing is “one of our most important affordable housing resources” to Forrest City Ratner’s Scott Walsh, who says we’ve lost sight of the original justification for rent stabilization.
“The program was designed to smooth out a very supply-constrained market. The program’s initial mandate was not to provide affordable housing,” says Walsh. “The city has other mechanisms to do that through NYCHA and other programs.”
The Rent Guidelines Board will hold hearings about its 2016-2017 rate decision over the next several weeks.
On Tuesday, May 3, at 7 p.m. there will be a public meeting and preliminary vote at Proshansky Auditorium in The CUNY Graduate Center’s basement at 365 Fifth Avenue between 34th and 35th Streets. Thursday, May 26 will see a 9:30 a.m. meeting in the conference room of the Landmarks Preservation Commission, located on the 9th floor of the David N. Dinkins Municipal Building at 1 Centre Street in Manhattan.
The rest of the board’s schedule is TBA and will be posted here.